RENEWABLE ENERGY:

A cautionary tale about feed-in tariffs

For a brief, shining moment, Spain was the best solar market in the world.

Unlike in cloudy Germany, the sun bakes Spain's southwestern provinces -- the brown, hard-packed Extremadura and Andalusía -- on the Mediterranean coast. And the Spanish government, eager to fulfill its commitments to renewable energy, guaranteed generous subsidies for any company that met its aggressive deadlines.

While the ministry expected a steady stream of investment, it got a flood, accounting for more than 40 percent of the world's total solar installations last year. Forced to revise the subsidies -- known as feed-in tariffs -- that it used to spur photovoltaic power last fall, Spain became one of the principal causes of the downturn in the solar industry. And its faulty regulations have become a watchword for how government renewable-energy programs, poorly conceived, can go awry.

"[The crash] was an inevitable consequence of a policy that was not ... a long-term sustainable market design," said Julie Blunden, vice president of public policy at U.S.-based SunPower Corp. "Whenever you've got something that's unsustainable, eventually it gives. And lo and behold, that happened."

Many in Europe and some in the United States view feed-in tariffs, which guarantee elevated electrical rates to qualified projects, as the best way to spur immediate development of renewable markets. The long-term stability provided by the subsidies lures capital, and the sliding scale of the tariff's prices, which typically drop each year toward average rates, encourages early adopters.

There are many success stories: Germany's program has become the model, with fellow E.U. countries France, Italy and the Czech Republic adopting similar schemes. In the United States, California began a small-scale feed-in system last year to great success, and states like Vermont and Washington have added similar programs this year.

Such programs would do well to learn from Spain's mistakes, solar executives and analysts say. In just one year of boom, the country committed itself to solar payments estimated at $26.4 billion, which in turn led to taxpayer backlash and bust.

"Spain is a perfect example of how drastic changes in policy can really kill a market," said Reese Tisdale, solar research director at Emerging Energy Research, "the caveat being the world economy tanked on us at the same time."

"What's important for the regulation of solar is stability," said Santiago Seage, the CEO of Abengoa Solar SA, one of Spain's largest solar developers. "Unfortunately, up to now, we have had too many changes. ... [And] if the context changes, you can make mistakes in business decisions."

The feed-in tariff established by Spain in 2007 guaranteed fixed electricity rates of up to 44 euro cents per kilowatt-hour to all new solar panel projects plugged into the electrical grid by September 2008. Also, a loophole in the tariff allowed bundles of small, ground-based projects to receive up to 575 percent of the average electricity price.

Given the country's abundant sunshine and such a beneficial tariff, the market was bound to overheat, Tisdale said.

"If [the tariff] is too high, then everyone is going to go to that market," he said. "That's just how it is."

What went wrong

The photovoltaic market has been cutting its costs rapidly, and the Spanish tariff, with its high rates, created an artificial market, developers said. And unlike Germany, Spain had no system built in to reduce tariff rates if its capacity targets were exceeded. Indeed, there were no stepped reductions, or degressions, at all. There was no ability to react.

"The most important lesson, which everyone has learned, is that if you're going to establish a feed-in tariff, you need to figure out how to make it market-responsive," Blunden said.

While the government had expected it would not see 400 megawatts of solar capacity in the country until 2010, by the fall of 2007, some 350 megawatts had already been installed. Chinese solar firms were sending container after container, flush with solar panels, to the country.

Scrambling, the government upped its target to 1,200 megawatts. But as it became clear the market would overshoot that limit, too, the boom became a frenzy as developers rushed to connect their projects to the grid before last September, when the government altered the tariff, dropping rates by 30 percent.

Many businesses feel burned by the boom and bust engendered by the tariff.

"If the Spanish government is going to pull the rug out from under them, that's kind of a problem," Tisdale said. "There will be a rush to get projects in the ground. They know in a mid-August night the government could pull the rug out from under them."

Many companies faced accusations of fraud, based on claims that they had connected to the grid by the government's deadline of Sept. 29. Spain's National Energy Commission is currently investigating several projects, according to ASIF, Spain's photovoltaic association. Still, even with this fraud, some 3 gigawatts of solar capacity were installed in Spain within 18 months.

Fallout

The repercussions of the tariff revision can still be seen today. The photovoltaic market was overwhelmed with excess panels, reducing prices. Demand from feed-in systems begun by Italy and France helped, but did not soak up all the excess supply. Spain's solar industry lost more than 20,000 jobs.

The downturn hit many manufacturers hard, like Germany's Q-Cells, which announced the layoff of 500 employees yesterday (Greenwire, Aug. 17). Prices for solar panels are at about half what they were last year, selling for about $2.40 a watt.

In the end, Spain was an accidental innovator, Blunden said. The government had hoped its tariff would spur construction of rooftop solar panels. Instead, it jump-started the ground-based solar industry.

"Spain demonstrated to the world how fast to market [solar] can be," Blunden said.

Americans and others would be wrong to avoid the feed-in tariff based solely on Spain's experience, Abengoa's Seage said.

"The feed-in tariff is a mechanism that, typically, Americans don't like," Seage said. "They believe it doesn't optimize costs for the taxpayers. ... Nevertheless, I feel it has a huge advantage. It's a simple mechanism to get the market started."

After the market is started, then you can fine-tune your numbers, Seage added.

The solar photovoltaic companies still operating in Spain have found themselves in a new business, said Eduardo Collado, ASIF's technical manager.

"The photovoltaic model has changed from large, ground-based installations to roof installations," he said. "The latter generate close to places of consumption. It is more distributed and close to consumers."

The government's revised tariff has set a hard cap of 500 megawatts to be built, most of this as more costly rooftop installations. Revisions to the tariff are made on a quarterly basis. Demand remains high, however, with 2,468 applications having been received recently, according to the Ministry of Industry, Tourism and Trade.

Spain will remain a viable solar market, most in the industry agree. But the whole process could have been much less painful with a bit more foresight.

In the end, Blunden said, it is a simple truth: "If you're not careful in your market design, you basically run out of money."

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